Protective Tax Refund Claims

Amended returns and claims for refunds with the IRS have become pretty standard. However, these are used when the issues and amounts are pretty clear. Occasionally a claim should be filed when the amounts are not known. Such a claim is called a “protective” claim. Here when this applies and how to do it.

A protective claim is a formal claim or amended return for credit or refund based on current litigation, expected changes in a tax law or other legislation or for other undecided events. In effect, a protective claim is filed when the right to a refund is contingent on a future event that may not be determinable until after the expiration of the statute of limitations. A valid protective claim need not list a particular dollar amount nor demand an immediate refund. It must, however:

1. Be in writing and signed
2. Include taxpayer’s name, address, SSN or TIN, and other contact information
3. Identify and describe the contingencies affecting the claim
4. Clearly alert the IRS to the essential nature of the claim
5. Identify the specific year(s) for which a refund is sought
6. The claim must be filed no later than three years from the time the return was filed (or required to be filed if filed before the original due date without an extension) or two years from the time the tax was paid, whichever is later

For IRS claims, using Form 1040-X is preferred.

Currently, the United States Supreme Court has agreed to hear California v. Texas, a case presenting a challenge to the constitutionality of the Patient Protection and Affordable Care Act (“ACA”) with its multiple tax provisions. If the ACA is deemed to be unconstitutional, individuals who have paid tax under that law may be entitled to refund. It is uncertain when this case will be decided but if you believe you are affected you should file a protective claim. For Forms 1040-X filed as protective claims under the ACA litigation, write at the top of the form “Protective Claim for refund under California v. Texas.”

You can also file protective claims for state tax refunds, but you should check with your state’s requirements for such protective claims.

This blog was prepared with the assistance of Marcus E. Dyer, CPA, Esq. in our Tax Controversy Group. For specific questions, you are welcome to contact Marcus at [email protected].

If you have any business or financial issues you want to discuss please do not hesitate to contact me at [email protected].